AP Micro & MacroMarket Failure & Government
Regressive Tax
A regressive tax is a tax system in which the tax rate decreases as the taxpayer's income increases, placing a higher relative burden on lower-income individuals.
Lower-income individuals pay a larger percentage of their income in taxes than higher-income individuals. Sales taxes are a common example because lower-income households spend a larger share of their income on taxed goods, and the Social Security payroll tax is regressive because earnings above a cap are not taxed. In both cases the effective tax rate (tax as a share of income) falls as income rises.